CREDIT CARD CALAMITY 

Author - Edmund Mierzwinski

Public Interest Research Group

Credit card companies now charge interest rates as high as 40% a year. There's no legal limit on the amount they can charge -- and, it seems, no limit to the tricky terms and conditions hidden in the fine print that card companies impose on unwary consumers. What you need to know...

THE UNIVERSAL DEFAULT TRAP

Many credit card companies are just waiting for you to miss a payment. Why? So they can jack up your interest rate. They've developed the concept of "universal default" to make this easier for themselves.

A universal default clause in your credit card agreement lets the company raise your interest rate even if you're late with a payment to some other creditor. If you miss a car payment, for instance, or you're late on some other credit card, your interest rate can shoot up.

Surprise: This can happen even though you've signed up for a zero-interest offer and have always paid that bill on time.

Universal default clauses are becoming standard in credit card agreements -- 45% of card issuers now have them, and most of these enforce them.

Self-defense 1: Read the fine print of your credit card agreement to see if you are subject to a universal default clause.

Sample universal default clause: "If cardholder is reported as delinquent on an account with any other creditor, we may increase the APR [annual percentage rate] on your account up to the maximum default APR."

Action: Shop around to find a card without this feature. Consumer Reports has listed 10 consumer-friendly credit cards that don't employ universal default policies (or clauses) and don't charge balance transfer fees. See the list and access the complete report at

http://www.consumerreports.org/cro/personal-finance/10-most-consumerfriendly-credit-cards-1105/index.htm

Self-defense 2: If you're stuck with universal default, never pay your bills late. Get into the habit of paying bills well ahead of the payment due date.

Self-defense 3: Keep a late credit card payment off your credit record. Ask the card issuer to ignore the late payment because you've been a good customer. Many companies will do this.

Self-defense 4: Be sure to read any changes to your credit cards'

terms and conditions -- an issuer can add a universal default clause at any time.

NO-LATE-FEE CREDIT CARDS

Shrinking grace periods (the time in which a payment is not considered late, which had historically been one month but today averages just 23 days) are making it easier for card companies to hit consumers with late fees. Sensing an opportunity, companies have developed no-late-fee credit cards. These cards often carry no annual fees and can save you as much as $39 for each late payment.

Trap: When you repeatedly miss the payment deadlines with some of these cards, your 0% introductory interest rate can skyrocket to 30% or more.

Other traps: Some companies eliminate the no-late-fee benefit during any billing period in which the customer doesn't use the card. And even with a no-late-fee card, if your payment arrives more than 30 days late, the card company will report your transgression to a credit-reporting agency, such as Equifax, which could cause other lenders to raise rates on your outstanding debts.

Self-defense: Steer clear of no-late-fee credit cards.

BALANCE-TRANSFER TRAPS

Consumer-friendly caps on balance transfer fees are vanishing.

Although most still have no balance-transfer fees, a quarter of credit card companies charge an average of 2.5%.

Balance transfers are considered cash advances. After a promotional transfer rate expires, usually after six months, the APR is often considerably higher on the remaining transferred balance than the APR for purchases -- sometimes by as much as nine percentage points.

Another trap: When you make a payment on a card to which you've transferred a balance, the payment is first credited to your purchase balance, not the balance-transfer balance. You have to pay off your purchase balance before you can even start making a dent in the transferred balance.

Self-defense: Read the fine print on any balance-transfer offers.

Reject any offers that you don't understand or that appear to have onerous terms like the ones above.

MINIMUM MONTHLY PAYMENTS

Federal regulators have ordered a substantial increase in minimum monthly payments to help consumers avoid long-term, high-interest debt. Some consumers may even see their minimum payment double -- going from 2% to 4%.

Trap: This change will help some borrowers pay off their debt more quickly and reduce interest costs over time -- but, for example, it will still take almost 12 years to pay off a $5,000 balance at a 16% APR (the current average) by making just a 4% minimum payment -- and total interest would be about $2,400!

Solution: Never make just the minimum payment. If you can't pay the full balance, always pay as much as you can afford.

If the new 4% minimum payment is a hardship, ask your bank to restructure or defer payments, lower your interest rate or waive fees. Some will. If yours will not, complain to its regulator. For more information go to  www.truthaboutcredit.org. The big card issuer MBNA has a guide to monthly minimum payment changes on its Web site

(http://www.mbna.com/services/minpaychange.html)